PEER COMPANIES

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PEER COMPANIES

NEW DELHI: And you thought midcaps and smallcaps have been under pressure over the past three months because of the Sebi reclassification, requiring mutual funds to rejig their portfolios?

Mutual fund houses across the board exited several midcap and smallcap stocks over the past three months. As such, while the largecap equity indices have shown signs of stabilising in recent weeks, midcaps and smallcaps continued to be in turmoil. In fact, these stocks continued to bear the brunt of the selloff in market.

Data showed BSE midcap and smallcap indices were up 50-55 per cent in last three years, but are down 10-12 per cent year-to-date. BSE smallcap and midcap indices fell 6 per cent each in May.

Some analysts say there has been a structural shift among institutional and individual investors towards largecaps, amid near-term concerns on domestic and global fronts, which has put pressure on midcaps and smallcaps.

"Earnings is a concern. Resignations by auditors at some midcap and smallcap firms too may be weighing on sentiment. There could a general shift towards safe haven blue chips,” said AK Prabhakar of IDBI Capital.

Portfolio analyses of mutual funds throw up some interesting trends.

BNP Paribas Asset Management exited 17 stocks, mostly smallcaps and midcaps, while adding only two new stocks from that basket. Among key exits were Shankara Building Products, Bharti Infratel, Galaxy Surfactants and Inox Leisure, among others.

Axis Mutual Find exited Shankara Building Products, Can Fin Homes, Apollo Tyres and Ajanta Pharma, RBL Bank and 12 others. Shares of Shankara Building Products had doubled in last one year. Can Fin Homes rallied 150 per cent in last three years and 1,130 per cent in last five, but has not performed well in last one year.

Canara Robeco Asset Management added three stocks and exited eight during the month. SH Kelkar, Parag Milk Foods and Lakshmi Vilas Bank were some of the smallcap scrips the fund house totally exited.

Birla Sun Life made five exits and added five. It sold off Reliance Naval, Just Dial, Narayana Hrudayalaya and Engineering and Jubilant FoodWorks.

Interestingly, the fund house added PC Jeweller in small quantity during the month even as many funds such as Edelweiss Asset Management, JM Financial Asset Management, L&T Investment Management and Axis AMC exited the counter.

BOI AXA Investment Managers exited 15 and added 8 stocks. Among the key exits were Minda Industries (up 1,182 per cent in 3 years), Avanti Feeds (up 6,627 per cent in five years), Thirumalai Chemicals (up 1,124 per cent in 3 years) and Somany Ceramics (up 600 per cent in five years). Some of these stocks are 40-50 per cent off their 52-week highs, thanks to recent selloff.

The fund house denied the exits had anything to with Sebi re-classification. “Normally, it’s good to take a relook at portfolio stocks after the end of the earnings reason to re-validate the investment hypothesis. If we find deviation from our initial understanding in terms of business model and valuation, we exit the stock,” it said.

Other fund houses said most of the recent exits were because of a change in their fundamental view about certain companies.

Many midcaps and smallcaps have gone off MF radar, partly due to high valuations and concerns over management transparency, said G Chokalingam of Equinomics Research.

Foreign brokerage UBS said the economic growth cycle in India is less strong now than in the historical tightening periods, and this is reflected in earnings cuts.

This could remain an overhang for smallcaps and midcaps. “Our analysis of flows suggests MF flows clearly had more relevance than foreign flows in last two years. We expect strong local MF flows to fade, as the demonetisation-led liquidity abates and interest rates rise,” UBS said in a recent note.

Many small and midcap firms have failed to meet expectations on the earnings front. UBS said corporates do believe the GST impact is over, but potential benefits like a shift in market shares from unorganised to organised sector is yet to be seen.

Investors continued to focus on buying opportunities when share prices dip, but relative valuations of smallcaps and midcaps suggest the optimism may be priced in but not the uncertainties despite the recent corrections, UBS said.

Among largecaps, HDFC was the most favourite pick among domestic mutual funds during May. It was followed by IT firms Infosys and HCL Technologies and FMCG major ITC. Power Grid, Kotak Mahindra Bank, IOC and TCS were among the top stocks that saw selling by mutual funds.